How do I calculate the below in excel. It must be calculated and presented in ex

Question

How do I calculate the below in excel. It must be calculated and presented in excel.

Suppose Alpha Industries and Omega Technology have identical assets that generate identical cash flows. Alpha Industries is an all-equity firm, with 10 million shares outstanding that trade for a price of $22 per share. Omega Technology has 20 million shares outstanding as well as debt of $60 million.

a. According to MM Proposition I, what is the stock price for Omega Technology?

b. Suppose Omega Technology stock currently trades for $11 per share. What arbitrage opportunity is available? What assumptions are necessary to exploit this opportunity?

Explanation / Answer

a. Stock price of Omega Technology = ($22 * 10,000,000 - $60,000,000) / 20,000,000

= $8 per share

b. Omega is overpriced. Sell 20 Omega, Buy 10 alpha and borrow 60. Initial = 220 – 220 + 60 = 60. Assumes we can trade shares at current prices & Assumes we can borrow at same terms as Omega (or own Omega debt and can sell at same price).

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